With no surprise, the Fed after their two day interest rate policy meeting continues to maintain short term interest rates at near zero and they maintained the “for an extended period” statement in there. At this point they have not given the market any clue that they are starting an interest rate hike cycle.
This continues to tell us that even with the large rally in the equity markets, we are not out of the neck of the woods and things are still holding together by a string. The New York Times article discusses the same important topic I have mentioned about the massive balance-sheet the Federal Reserve has at the moment that is filled with many mortgage related securities and so-called toxic assets.
With the position our banking system is in, they are in no place to purchase back the over $1 trillion dollars in assets they are holding on their books. Until we can deal with those assets in a transparent manner, we can not say that we have a real recovery in our financial system. If they aren’t dealt with then they have essentially been off-loaded to the public and that would be a tragedy having to deal with the inflation associated with that because the banks would have all that extra cash to lend with.
New York Times - The Federal Reserve on Wednesday kept short-term interest rates near zero and maintained, as it has for nearly a year, that rates would stay at that level for “an extended period.”
Despite intense market speculation, the central bank disclosed nothing about the fate of the $2.3 trillion balance sheet it accumulated as it acquired mortgage-backed securities in an effort to prop up the housing market.
The Fed reiterated its expectation that the benchmark fed funds rate would remain “exceptionally low,” as it has since December 2008, for some time, despite growing concerns among policy makers that the stance was too constraining.
Interesting they are still keeping interest rates low for an “extended period” even though we are in a recovery. They must know something we don’t. They called the recovery moderate for sometime and that tells me that the earnings will not keep up with where the market is priced so we should see a correction.
LA Times – Washington D.C. - Reporting from Washington – Amid the political rancor over Federal Reserve Chairman Ben S. Bernanke’s bid for a second term, central bank officials encountered some dissension in their first policy-setting meeting of the year, even as they affirmed their pledge to keep interest rates at near zero for “an extended period.”
Until we see the government support of the economy withdrawn and the economy shows it can operate normally without that intervention, we will not see rates raising anytime soon.
The Fed does not see inflation as a threat at this point as well. The stock market is rising rapidly and with the amount of money and credit that has been pumped into the market with low interest rates, it is not surprise we are seeing these increases. The test will be, can these companies make their earnings and conduct their normal financing operations is the normal regulated private market.
Business Journal, Milwaukee - Increased lending costs put a crimp in mortgage applications last week. The Mortgage Bankers Association’s index of applications to purchase or refinance a home fell 3.5 percent from the previous week.
The refinance index fell 7.2 percent in the week ended Aug. 7, reversing the 7.2 percent gain made in the previous week. The purchase index, however, increased 1.1 percent – the third gain in the last four weeks, according to the MBA.
Well this aligns with most analyst predictions of a zero-interest rate environment coming to America. This can only last for so long, at some point interest rates will have to rise to pull this excessive money that has been injected into the system and if our fundamental problems with the destruction of the middle class is not solved then it will just crush the economy again and make things even worse. How long will it take until we start hearing real solutions from our officials that solve the real problems and does not reward people that make problems?
The U.S. Federal Reserve is expected to drop interest rates close to zero on Tuesday, but anticipated remarks on unconventional methods to dispel a year-old recession are what will really matter.